2018-02-23

Anbang Seized Early in Deleveraging Effort

It’s a remarkable turn for Anbang, which burst onto the global scene in 2014 with the purchase of New York’s Waldorf Astoria hotel and only a year ago was in talks to invest in a company owned by the family of Jared Kushner, U.S. President Donald Trump’s son-in-law and senior adviser. With 2 trillion yuan ($315 billion) of assets, Anbang represents China’s largest-ever takeover of a privately owned company.

...The surprise move furthers President Xi Jinping’s anti-corruption and de-leveraging campaigns while providing a government backstop for the high-yield investment products that Anbang sold to hordes of Chinese citizens.

The cost of the bailout depends on the value of the underlying assets. If those asset prices start sinking, the Chinese central bank will be called on to make up the difference.

The takeover may end in a year if asset disposals are completed, strategic shareholders have injected capital and the company is stable. Government control can be extended by as much as another year if needed, but Anbang will ultimately remain a private company.

Anbang grew by borrowing short and investing long:

Much of Anbang’s growth was tied to sales of short-term, high-yield products that the company used to fund purchases of long-term assets such as real estate -- creating a duration mismatch that worried analysts and regulators. One of its products, called Anbang Longevity Sure Win No. 1, boosted its premiums almost 40-fold in 2014 by offering some of the juiciest yields in the industry.

Maybe this is a coincidence, maybe not:

This isn’t the first time Chinese regulators have had to step in when an insurer ended up in trouble. In 2007, the government tapped an industry protection fund to take control of New China Life Insurance Co. by buying a major stake in the insurer, after its former chairman Guan Guoliang misused funds.

I guess the NYC Landmark signal still works. Anbang goes wobbly just a few short years after its splashy purchase of a trophy Manhattan property, the Waldorf-Astoria Hotel. It brings to mind the Japanese real-estate bubble in the late 80s, and one has to wonder whether China will suffer the same retreat eventually.

When HNA needed a bailout, UBS wrote:

A default scenario would increase funding costs for high-yield issuers, mainly Chinese property companies and LGFVs, and could push out spreads on junk bonds in the region by 160-240 basis points, according to a Feb. 6 equity strategy note

Contagion need not be falling dominoes, rather the rising cost of credit eventually causes widespread defaults.

China managed to contain smaller defaults in prior years, but the numbers keeps getting larger. It has strict capital controls in place because it cannot otherwise stop capital outflows. It is less than a year into deleveraging efforts, efforts that accelerated following the October 2017 National Congress.

There are no free lunches. Losses can be shifted, they can be papered over, they can be hidden, but they cannot be eliminated. As always, the most likely place China's mistakes will compile is on the central bank's balance sheet.